Solar PV LCOE Breakdown

Over the past decade, costs trends within the renewable energy sector have been dramatically decreasing, making wind (as discussed in our post “Wind Energy LCOE Breakdown”) and solar two of the most competitive energy sources. 

This post expands on ideas we presented in the article “LCOE’s to Compare Energy Investments”, looks more deeply at particulars of the solar PV LCOE calculation and analyses past and current cost trends for utility-scale ground-mount and residential and commercial rooftop solar projects. 

The global weighted average LCOE for utility-scale solar photovoltaic (PV) fell an astonishing 82% between 2010 and 2019, largely due to declining module prices and Balance-of-System (BoS) cost reductions. BoS costs include all components of a PV system other than the panels themselves: wiring, switches, mounting system, inverter(s), and storage equipment. 

Most recent technological advancements (for example monocrystalline solar modules from China, which have an efficiency rate of around 19%) drove down costs even further. This accounted for a global weighted average LCOE decline of 13% year-on-year in 2019. As mentioned in “Solar PV Milking the Sun,” work is under way to further improve solar module efficiency rates. Doing so will result in even more cost reductions.^[1]

Not only have the costs of utility-scale solar PV installations fallen, but residential and commercial rooftop applications also have seen enormous reductions both in costs and LCOE.

In most instances, rooftop applications have a higher costs structure and a lower efficiency rate than utility-scale projects. This is largely due to economies of scale and better orientation of the panels themselves. Nevertheless, a decline of between 42% and 79% has been recorded over the past 10 years, depending on country and market. India and China have seen the lowest LCOE’s for commercial rooftop applications at USD 62 and USD 64 per megawatthour (MWh), respectively. 

India also demonstrated the lowest LCOE’s for utility-scale solar projects at USD 45/ MWh, an impressive 34% lower than the global weighted average of USD 60/MWh. Spain and China also have shown their ability to install low-cost, competitive solar farms with weighted average values of USD 54 and 56/MWh, respectively, in FY2019. 

As already mentioned, module costs were one significant driver behind bringing down the LCOE’s of many solar power installations. For example, Europe has enjoyed a roughly 90% decline in the cost of crystalline solar PV modules over the past decade. Today, one can get low-cost modules for a benchmark price of USD 211/kilowatt (kW), while mainstream manufacturer’s prices stand at USD 267/kW. High-efficiency modules require a significantly higher investment with benchmark prices of around USD 367/kW. The main differences between these modules are the efficiency rate–which can vary by 15% and more–the annual rate of degradation, overall life expectancy and frequency of defects. 

The general formula for calculating the per megawatt costs for all kinds of energy-related projects is as follows: 

LCOE = [S^t_n=1 (I_t + M_t + F_t) / (1+r)^t] / [S^t_n=1 E_t / (1+r)^t] 

where (i) I_t is the invested capital in period t, (ii) M_t are the costs of maintenance in period t, (iii) F_t is the cost of fuel in period t, and (iv) E_t is the energy output in period t. 

However, as we mentioned in “Wind Energy LCOE Breakdown,” more detailed formulas can be used to better calculate the LCOE’s of specific energy sources. Doing so plays an important role for residential PV installations, as these systems often are accompanied by specific cost-based incentives, loan and interest payments and tax breaks. Penalty and royalty fees rarely need to be accounted for in residential appliances even though they play a role in utility-scale solar farms and commercial rooftop solar installations as a consequence of Purchase Power Agreements (PPAs). Therefore, two separate formulas, one for commercial and one for residential, are provided below. 

To more accurately calculate the LCOE for commercial and utility-scale solar PV applications and projects, we can use the same formula that we used for wind energy, as the types of costs do not differ significantly. The main difference is the variation in how the costs are distributed. 

LCOE = [Sⁿ_i=0 (I_i + OM_i + F_i – TC_i – D_i – T_i + Pen_{i +} R_i) / (1+r)ⁱ] / [Sⁿ_i=1 E_i / (1+r)ⁱ] 

where (i) I_i is the invested capital in period i, (ii) M_i is the costs of maintenance in period i, (iii) F_i is the cost of fuel in period i, (iv) E_i is the energy output in period i, (v) TC_i is the tax credit in year i, (vi) Pen_i is the sum of the production loss and the penalty (paid for non-compliance) in year i, (vii) D_i is the depreciation in year i, (viii) T_i is the tax levy, and (iv) R_i) is the royalties of the corresponding year. Tax credit and Penalty are subject to each specific PPA.^[2]

In general, this formula is the equivalent of the ratio of lifetime costs to lifetime electricity generation, discounted back to a given year, i=0.

Residential systems present incredible potential, for example when combined with Blockchain to establish autonomous towns and smart cities as we described in “Energy Sector 5.0 Through Blockchain Technology.” This means we need to slightly adjust the above formulas to be able to provide homeowners and environmentally conscious energy consumers with a more accurate method for estimating system LCOE’s. 

LCOE_residential = {PC – CBI – PVPBI – S + Sⁿ_i=1 [LP_i/(1+r)ⁱ] – Sⁿ_i=1 [INT_i/(1+r)ⁱ]*ETR + Sⁿ_i=1 [OM_i/(1+r)ⁱ] / [Sⁿ_i=1 E_i / (1+r)ⁱ] 

where (i) PC is the project costs, (ii) CBI is cost-based incentives, (iii) PVPBI is the present value performance benefit incentives (relevant in many US states), (iv) country-specific subsidies, (v) LP_i is the discounted  loan payments in period i, (vi) INT_i is the discounted interest payments in period i multiplied by the ETR (effective tax rate), (vii) OM_i is the discounted Operations & Maintenance costs, and (viii) E_i is the energy output in period i. (Note that O&M costs are included in the formula, however, it is uncommon to consider these costs for residential systems due to their relatively high amount when compared to marginal gains.) 

This formula extension should better represent the actual costs that a residential solar PV installation can offer. Such costs often are overestimated, making residential solar installations appear less compelling than they are. 

Given the favorable comparison in terms of costs, why are energy companies still pursuing non-renewable projects like coal and natural gas? 

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^[1] IRENA_Power_Generation_Costs_2019 

^[2] http://escml.umd.edu/Papers/Bruck%20LCOE%20PPA%20paper.pdf